Deck 3: Forward Markets and Transaction Exchange Risk

Question 1

Why are the bid-ask spreads larger in the forward market than in the spot market?

A) because the forward market is less liquid than the spot market
B) because the spot market is more volatile than the forward market
C) because the forward market is more liquid than the spot market
D) because the spot market is less liquid than the forward market

Answer 1

A

Question 2

What is a spot-forward swap?

A) the purchase of foreign currency spot against the sale of the same amount of foreign currency forward
B) the sale of foreign currency spot against the purchase of the same amount of the foreign currency forward
C) both the purchase or sale of a foreign currency spot against the sale or purchase of the foreign currency forward
D) the purchase of a foreign currency forward contract at the outright rate

Answer 2

C

Question 3

How much of the probability distribution of future spot rates is between plus or minus two standard deviations?

A) 95.44%
B) )167%
C) 98%
D) 4.55%

Answer 3

A

Question 4

What is the term for the conditional mean of the probability distribution of future spot rates?

A) the expected swap rate
B) the future exchange rate
C) the outright rate
D) the expected future spot rate

Question 5

What is the name of the action that uses derivative securities to reduce risks arising from underlying business transactions in financial markets?

A) forward contracts
B) hedging
C) forward rates
D) speculating

Question 6

A swap transaction in the forward market involves the simultaneous sale and purchase of a certain amount of foreign currency for ________.

A) one specific date in the future
B) many different dates in the future
C) two different dates in the future
D) speculation under the correct conditions

Question 7

If the euro is selling at a premium relative to the USD in the forward market,is the forward price of USD /EUR larger or smaller than the spot price of the USD /EUR?

A) larger
B) smaller
C) indeterminate
D) the same

Question 8

If the forward price of a currency contract is lower than the spot rate,the currency is said to be at a

A) forward discount.
B) forward premium.
C) future expected exchange rate.
D) forward swap rate.

Question 9

If you want to hedge and owe a firm a foreign currency in the future,you would

A) buy the foreign currency forward.
B) sell the foreign currency forward.
C) speculate on the possibility to not hedge.
D) buy the currency now and deposit into a bank account until needed.

Question 10

One of the major reasons for the existence of the forward market is to ________.

A) provide a location for all currency traders to assemble and trade
B) manage currency risk especially risk associated with a transaction
C) hedge transactions involving foreign currency that occurred in the past
D) prevent default in the transaction

Question 11

In the forward market the bid-ask spreads begin to ________ as the maturity date of the contract grows closer.

A) widen
B) narrow
C) stabilize
D) disappear

Question 12

What is the name of the exchange rate specified in the forward contract?

A) spot rate
B) forward rate
C) future exchange rate
D) cross-rate

Question 13

What is meant by the conditional future spot rate?

A) the forward rate
B) the forecasted future spot rate
C) the conditional variance of the probability distribution of future spot rates
D) the conditional mean of the probability distribution of future spot rates

Question 14

What is the name of the contract where corporations,institutional investors,and individuals are required to pay or to receive a specific amount of foreign currency at a specific exchange rate at a particular date in the future?

A) forward foreign exchange market
B) forward currency contract
C) forward rate contract
D) future hedge contract

Question 15

If the forward price of a currency contract is higher than the spot rate,the currency is said to be at a

A) forward discount.
B) forward premium.
C) future expected exchange rate.
D) forward swap rate.

Question 16

When does delivery occur on a 90-day forward contract?

A) in 90 days corresponding to two business days preceding the third Wednesday of the month
B) immediately but the contract is not closed for 90 more days
C) in 90 days corresponding to the calendar date of the spot value date
D) two business days following the spot value date

Question 17

If the USD is selling at a discount relative to the yen in the forward market,is the forward price of JPY/USD larger or smaller that the spot price of the JPY/USD?

A) larger
B) smaller
C) indeterminate
D) the same

Question 18

Which one of the following options is not a type of swap?

A) the sale of foreign currency short-term forward against the purchase of foreign currency forward
B) the purchase of foreign currency short-term forward against the sale of foreign currency long-term forward
C) the purchase of foreign currency spot against the sale of foreign currency forward
D) the sale of foreign currency short-term forward against the purchase of foreign currency long-term forward

Question 19

In a forward contract no monies change hands until the maturity date of the contract known as the ________,

A) spot value date
B) exercise date
C) forward contract date
D) forward settlement date

Question 20

One important purpose of the forward markets for foreign exchange allows global traders to protect themselves by ________.

A) hedging
B) arbitraging
C) speculating
D) preventing default

Question 21

Suppose the quote on pounds was $1.624-31.If you converted $10,000 to pounds and then back to dollars,how many dollars would you end up with?

Question 22

What is the statistical interpretation of the expected future spot rate?

Question 23

Suppose the spot quote on the euro is $0.9302-18,and the spot quote on the Swiss franc is $0.6180-90.What is the direct spot quote for the Swiss franc in Frankfurt?

Question 24

From the perspective of the MNC,the most important purpose of the forward markets is the process of ________.

A) hedging
B) arbitraging
C) speculating
D) preventing default

Question 25

On December 3,2001,spot Japanese yen were sold at $0.008058.Suppose the 180-day forward Japanese yen was selling at a 1.91% annualized premium,what is the 180-day forward rate of the yen?

A) 0.008245
B) 0.008135
C) 0.008457
D) 0.008550

Question 26

If you were asked to forecast the future spot rate of a currency,how much of the probability distribution of the rate is between plus or minus 2 standard deviations?

A) 12.55%
B) 24.55%
C) 62.87%
D) 95.44%

Question 27

It is 1998.The spot and 30-day forward rates for the Dutch guilder are $.3075 and $.3120,respectively.The guilder is said to be selling at a forward

A) premium of 16.83%
B) premium of 17.56%
C) discount of 6.39%
D) discount of 15.10%

Question 28

How is the forward value date calculated on a 90-day forward contract?

Question 29

What is a forward-forward swap?

Question 30

Why would an MNC use a spot-forward swap?

Question 31

Suppose the spot rate and forward rate for the British pound are $1.4248 and $1.4179 respectively.Assume the forward pound is selling at a 1.94% annualized discount,what is the number of days of the forward contract?

A) 180 days
B) 120 days
C) 90 days
D) 60 days

Question 32

If the British pound is selling at a premium relative to the euro in the forward market,is the forward price of EUR/? larger or smaller than the spot price of EUR/??